At last an admission from the banks that their loose lending policy is the cause of some of agricultures indebtedness. A change in policy will require loans to be approved on earning capacity, which will enable the farm to service the debt, ahead of a reliance on capital growth to ensure security of the loans.
The numbers of at risk customers have been identified, and they will be encouraged to pay down as much debt as they can, under these times of favourable commodity prices. These new rules should change the attitudes of farmers from a capital growth focus, to being profit driven which will be a much more sustainable system for all in agriculture.
The country's largest rural lender has sharpened its loan policy to tackle the sector's indebtedness reports Rural News. ANZ Bank, which holds 40% of rural loans, is no longer lending money to farmers on asset valuation but on earning capacity. Loans for dairy conversions have been cut back and all loans are signed off by two bank officials. Speaking at the SIDE 2011 conference at Lincoln last week, Wilks said too many conversion loans "were done on the back of cigarette packets; there were too many cost overruns."
Concerns about ballooning rural debt prompted the bank to review its dairy loan book in 2009. It found 1100 farmers carrying $6 billion debt. The concern was about 100 farmers in "dire circumstances" struggling to service interest bills of 8% at a milk payout of $5.40/kgMS. Another 370 farmers were found in the "high risk category". Wilks says based on ANZ's market share, its figures translate into 250 farmers in dire situations throughout the industry. Another 1000 are high risk. "The farmers in trouble made excessive use of leverage and over-reliance on capital gains."
"The farming sector is over-capitalised and over-indebted," he told delegates. "The world will not lend us money to grow our debt 4-5 times faster than our economy." The good news is that the industry "dodged the bullet", he says. If the payout had remained at $4.50/kgMS, the country would have been in trouble. But farmers are not the only guilty party. The banks also played a role by watering down loan terms and conditions to win business. Borrowers took comfort in banks' readiness to lend them money. Inexperienced customer managers were vouching for their farmer clients' ability to repay.
Wilks says banks were also wary of would-be borrowers taking the attitude that if a loan was not approved "the bank down the road would take it." The bank now has corporate bankers managing corporate-style loans. And it stays in touch with farmers to ensure their businesses are going well.
Loan sizes depend on underlying earning capacity and ability to service, says Wilks. "We are open for business but we're now conducting business in a responsible way," he says. "We want to prevent problems repeating in the long term interest of banks, employees and customers."
8 Comments
The thing that bugs me is the fact that these "boys" at ANZ/National have been playing fast and loose with my retirement nest egg. This revelation of banks lending on asset valuations supports the notion that farmers have been farming for capital gain for years. The taxable return on pumped up asset values has been a joke for years
Went and saw a real estate mate about a farm that just sold, there were no buyers for the whole thing as no one could get finance, they sold off 400 acres and the house, the buyers had trouble but in the end BNZ came through, with I suspect a %100, secured against the farmers other farm. ANZ/NAT,Rabo wouldnt play ball at all. The price, 2.1 mil pretty good price, I suspect about double the value of the farm.
On the way home my bank manager phoned and asked why I hadn't sent my previous years accounts in, I said because I had no debt with the bank, he said if I want an overdraft facilty then they want to see my accounts and he was a bit rude. I think Id better ask to see their accounts to make sure all the money in the other account at the same bank is OK. Bank managers are getting nasty even with guys in credit.
About time Banks took some ownership of the rural debt issue. Other areas they need to look at is incentivised lending and their bonus systems as well.
Banks also need to look at management systems when there are successive droughts and severe weather bombs, as that all impacts on the bottom line.
Interesting that the Valuation system is being scrutinized with changes being introduced on the use of valuers and also SFO loking at valuers that have valued properties 4-5 times market values. A lot of the rural mangers did their own valuations as well and submitted to credit control.
More scrutiny needs to take place on some rural mangers that helped fund transactions using same land agent, lawyer and valuer in some areas as well. The rural bank mangers also submitted budgets that were never going to work.
The Reserve Bank admits there was lack of sufficient oversight but relied on the Banking industry to be prudent, market forces at work.
Oh, and then I get home to a letter from the local lawyers to say there has been a bit of trouble, they have had to ask a partner to leave because he has gotten into 'financiial problems', and they are due to be audited by the law society.
Don't forget the few farmers in trouble are the ones with huge debts like cafars. this is a problem involving billions.
I just visited a new conversion. Well its still a drystock, but the property next door is converted by the same guy. Now all you sheep farmers out there take a deep breath.... The woolshed and covered yards have just been gutted. The native flooring of the woolshed has been burnt. All the railings from the yards are heading in the same direction. The cost of turning this woolshed into an implement shed is similar to building a new one., with new poles goin in, and the time involved in gutting it.
It just seems criminal. The sheer waste. The short sightedness. I dont see this as progress, I just see it as borrowed money still going mad...and how will they ever drag enough milk out of the old biddies to pay for it all. In a few years time they will be back sheep farming there, and doing a refit on the woolshed and yards. Crazy
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